- Category: European Union Carbon Market Glossary
The Innovation Fund is a funding instrument set up for the revised EU Emissions Trading System (EU ETS). The Fund will amount to about (the revenues of these sales depend on the carbon price) EUR 20 billion. Hence, the Innovation Fund became one of the world's largest programmes for the demonstration of innovative low-carbon technologies, financed by revenues from the auction of emission allowances from the EU's Emissions Trading System
In detail the funding comes from:
- market value of at least 450 million allowances at the time of their auctioning from 2020 to 2030,
- any unspent funds from the NER300 programme,
- up to 50 million allowances which may be made available to the fund if not needed for the EU ETS Market Stability Reserve (MSR).
The Innovation Fund supports, on a competitive basis, the demonstration of innovative technologies and breakthrough innovation in sectors covered by the EU ETS, including innovative renewables, carbon capture and utilisation (CCU) and energy storage (Report from the Commission to the European Parliament and to the Council, Report on the functioning of the European carbon market, COM(2018) 842 final, p. 10). Projects in all EU Member States, including small scale projects, are eligible. The procedure for making the Innovation Fund operational started with a public consultation, which was carried out in the period 15 January 2018 - 10 April 2018.
The legal basis for the operation of the Innovation Fund is Article 10a(8) of the EU ETS Directive (Directive 2003/87/EC, as amended by the Directive 2018/410).
The said Article 10a(8) of Directive 2003/87/EC establishes the Innovation Fund and lays down general rules of the functioning of the Innovation Fund, namely, the source of the Innovation Fund revenues, the projects eligible for the Innovation Fund support, as well as the general rules for the disbursement of the support.
Moreover, Article 10a(8) specifies the criteria for the selection procedure and allows the complementary financing of the eligible projects to be provided by the Member States or the Union.
In addition, Article 10a(8) of Directive 2003/87/EC empowers the European Commission to adopt delegated acts to supplement the Directive concerning rules on the operation of the Innovation Fund, including the selection procedure and criteria. This delegation has been exercised by the Commission Delegated Regulation (EU) 2019/856 of 26 February 2019 supplementing Directive 2003/87/EC of the European Parliament and of the Council with regard to the operation of the Innovation Fund. The said Regulation establishes the rules necessary for the operation of the Innovation Fund while at the same time leaving some decisions to be made in the calls for proposals and in the contractual documentation.
The key vehicle to deliver the support through the Fund are grants - the Innovation Fund will cover up to 60% of the relevant costs (in line with Article 10a(8) of the EU ETS Directive). Small-scale projects are treated preferentially (by establishing a simplified definition of relevant costs).
The Regulation envisions the following structure of financing:
- up to 40% of the award provided as upfront funding at financial close (to de-risk projects),
- the remaining 60% of the grant provided according to the cash-flow needs of the project at specific milestones.
The two-phase application procedure is envisioned. The calls for proposals for the Innovation Fund will be organised centrally by the European Commission with the support of implementing bodies.
The Regulation also lays down the rules for reporting, monitoring, evaluation, control, and publicity.
Fit for 55
Recent legislative proposals Fit for 55 increase the Innovation Fund even more European Commission Proposal of 14 July 2021 for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757, COM(2021) 551 final, 2021/0211 (COD), Article 10a(8)). The scope of the Innovation Fund is extended to allow it to provide support to projects through competitive tendering mechanisms such as Carbon Contracts for Difference (CCfDs).
In addition, the Innovation Fund is increased by 50 million allowances sourced in the same manner from the allowances available for free allocation and for auctioning as is the case for the current endowment of the Fund. As a result, 40 million allowances will stem from the allowances available for free allocation, and 10 million allowances from the allowances to be auctioned.
Projects financed from the Innovation Fund
Regular calls for proposals up to 2030 are foreseen, however, the provisions do not set any timing in-between, thus enabling the necessary adaptations to demand and maturity of the projects. The first call for proposals was envisioned to be published in January 2020 (Commission Staff Working Document, Progress in Accelerating Clean Energy Innovation 2018, 9.4.2019 SWD(2019) 157 final, p. 17).
On 4 November 2021 the European Commission awarded first three grants under the Innovation Fund. The first three projects to be financed since the creation of the Innovation Fund signed their grant agreement with the European Climate, Infrastructure and Environment Executive Agency (CINEA), the implementing body of the Fund. They will benefit from a total grant of EUR 12.7 million. The three projects focus on the decarbonisation of flat glass production, the provision of innovative renewable heating in industrial application and the direct capture of CO2 through water in France, Croatia and Iceland respectively.
In addition, on 4 November 2021 the European Commission adopted a decision on the award of EUR 1.7 million for project development assistance to 10 projects. These projects aim to reduce greenhouse gas emissions in different energy-intensive industries and energy storage. The European Investment Bank (EIB), which provides the service, helps them advance their maturity through tailored assistance, such as improving their technical documentation and financial models.
In turn, on 16 November 2021 the European Commission granted awards for over €1.1 billion under the Innovation Fund into seven large-scale innovative projects aiming to bring breakthrough technologies to the market in energy-intensive industries, hydrogen, carbon capture, use and storage, and renewable energy, as follows:
1. as regards energy-intensive industries:
- project in Sweden aims to entirely eliminate greenhouse gas emissions from steel production by using renewable hydrogen in Gällivare and Oxelösund,
- project in Finland, will demonstrate two ways of producing clean hydrogen at a refinery in Porvoo, through renewable energy and by capturing CO2 and permanently storing it in the North Sea,
- project in France will capture unavoidable emissions in a cement plant and in part store the CO2 geologically in the North Sea and in part integrate it into concrete,
- project in Belgium to reduce the emissions in the production of hydrogen and chemicals will develop a complete carbon capture, transport and storage value chain in the Port of Antwerp;
2. as regards enewable energy:
- project in Italy will develop an industrial-scale pilot line for the manufacture of innovative and high performance photovoltaic cells in Catania,
- project in Spain will convert non-recyclable municipal solid waste in El Morell to methanol, a key basic chemical and low-carbon fuel,
- project in Sweden will create a full-scale bioenergy carbon capture and storage facility at its existing biomass combined heat and power plant in Stockholm.
It is noteworthy, on 26 October 2021 the European Commission launched the second call for large-scale projects with a budget of €1.5 billion. Projects can apply via the EU Funding and Tenders portal where more details on the overall procedure are available. The deadline for submission of applications is 3 March 2022. Applicants will be informed about the results of the evaluation in the third quarter of 2022. The grant awards and signature of projects will take place in the fourth quarter of 2022. An Info Day was organised on 10 November to give prospective applicants and other stakeholders the opportunity to get information and ask questions on the new call (see documentation here).
In response to the second call for large-scale projects, the European Commission received 138 applications for innovative clean tech projects in all eligible categories: renewable energy, energy-intensive industries, energy storage, and carbon capture and storage.
on 31 March 2022 European Commission launched the second call for small-scale projects under the Innovation Fund;
- on 1 April 2022 the European Commission signed grant agreements of €1.1 billion with seven large-scale projects via the EU Innovation Fund, funded by revenues from the EU's Emissions Trading System. These projects aim to reduce emissions by over 76 Mt of CO2eq during the first ten years of operation. The seven projects are deploying innovative low-carbon technologies at industrial scale, covering key sectors such as hydrogen, steel, chemicals, cement, solar energy, biofuels, and carbon capture and storage.
Article 10a(8) of the Directive 2003/87/EC after amendment made by the Directive 2018/410
325 million allowances from the quantity which could otherwise be allocated for free pursuant to this Article, and 75 million allowances from the quantity which could otherwise be auctioned pursuant to Article 10, shall be made available to support innovation in low-carbon technologies and processes in sectors listed in Annex I, including environmentally safe carbon capture and utilisation (‘CCU’) that contributes substantially to mitigating climate change, as well as products substituting carbon intensive ones produced in sectors listed in Annex I, and to help stimulate the construction and operation of projects that aim at the environmentally safe capture and geological storage (‘CCS’) of CO2 , as well as of innovative renewable energy and energy storage technologies; in geographically balanced locations within the territory of the Union (the ‘innovation fund’). Projects in all Member States, including small-scale projects, shall be eligible.
In addition, 50 million unallocated allowances from the market stability reserve shall supplement any remaining revenues from the 300 million allowances available in the period from 2013 to 2020 under Commission Decision 2010/670/EU, and shall be used in a timely manner for innovation support as referred to in the first subparagraph.
Projects shall have the potential for widespread application or to significantly lower the costs of transitioning towards a low-carbon economy in the sectors concerned. Projects involving CCU shall deliver a net reduction in emissions and ensure avoidance or permanent storage of CO2. Technologies receiving support shall not yet be commercially available but shall represent breakthrough solutions or be sufficiently mature to be ready for demonstration at pre-commercial scale. Up to 60 % of the relevant costs of projects may be supported, out of which up to 40 % need not be dependent on verified avoidance of greenhouse gas emissions, provided that pre-determined milestones, taking into account the technology deployed, are attained.
The Commission is empowered to adopt delegated acts in accordance with Article 23 to supplement this Directive concerning rules on the operation of the innovation fund, including the selection procedure and criteria.
Allowances shall be set aside for the projects that meet the criteria referred to in the third subparagraph. Support for these projects shall be given via Member States and shall be complementary to substantial co-financing by the operator of the installation. They could also be co- financed by the Member State concerned, as well as by other instruments. No project shall receive support via the mechanism under this paragraph that exceeds 15 % of the total number of allowances available for this purpose. These allowances shall be taken into account under paragraph 7.
Commission Delegated Regulation (EU) 2019/1868 of 28 August 2019 amending Regulation (EU) No 1031/2010 to align the auctioning of allowances with the EU ETS rules for the period 2021 to 2030 and with the classification of allowances as financial instruments pursuant to Directive 2014/65/EU of the European Parliament and of the Council, Recital 4